GXS Insights

The ½% Solution – Part 1

by Bryan Scott Larkin, Industry Marketing Director, GXS

As originally published in the Journal of Trading Partner Practices.

Retail and CPG Proposition

Half of a percent. Doesn't sound like much, does it? What if your business has gross revenues of $100M each year? ½% is $500,000. How about a $500M business? That would be $2.5M. And a billion dollar business? $5M. Yes, you get the picture. It doesn't sound like much, but it might be the difference between positive and negative earnings this year if that half of a percent is added to the bottom line.

What if I told you that you could save this much of your gross revenue every year and put it right to the bottom line? Would you be interested? You'd first want to know what it would cost to enable these savings, right? That would be a smart first question. The answer is definitely less than the savings. It could be much, much less. Interested?

The solution doesn't require any magic. It doesn't require emerging technologies like RFID. In fact, it may not require you to purchase any new software or hardware. It does require you, though, to be smart about how you are using your resources - your hardware, software, vendors, trading partners, and your people.

Overview

In 2005, The Retail Compliance Council (RCC) jointly published a white paper called "Benchmarking the Perfect Order". This paper provided an elegant overview of the order-to-settlement process in the retail supply chain and identified four key ingredients to the Perfect Order. This article and its forthcoming companion address three of those four key ingredients as means to a more successful - functionally and financially - supply chain.

While you might think it logical to start with the beginning processes in the supply chain, we'll start near the end instead. The reason is that it is important to build a case to help you understand the type of things that can and do go wrong in the retail supply chain so there is some contextual value to making recommended changes. In fact, each step of the way we will recommend solutions that, taken together, will lead to the types of bottom line results mentioned in the title - one half of a percent.

Root of all Evil (or Don't Settle for Less)

To start, we want to consider a root-cause analysis and for that, we'll look at the settlement process. Almost invariably the settlement process is an ugly place to visit because it is usually a reflection of all the problems that have occurred in the supply chain for a given transaction, and sometimes events associated with other transactions. Settlement can be complex, time consuming and costly. The perfect order white paper characterizes the perfect order "as being on time, complete, damage free and having accurate documentation." The retailer considers an order in this light and then compares the invoice to how "perfect" the order was. The retailer also considers ongoing promotions and other outstanding allowances they feel they are entitled to. They use those factors in deciding what to pay. Sometimes what they pay isn't what is listed on the invoice and this starts a cycle on the supply side of determining whether or not the deductions from the invoice are valid.

Annual Sales (in millions)	Deductions (in millions)	Compliance Related (est.)
$100	$4	$1M - $2M
$250	$10	$3M - $6M
$500	$20	$5M - $10M
$750	$30	$8M - $16M
$1,000	$40	$10M - $20M
$2,500	$100	$25M - $50M
$5,000	$200	$50M - $100
$10,000	$400	$100M - $200M

The Credit Research Foundation and the Vendor Compliance Federation conducted a survey and published the findings in "Customer Deductions: Impact on Receivables 2006 Edition". According to the survey, manufacturers that supply mainly to retailers reported an average deduction rate of 4% of sales. If you fit this profile and your sales are $500M per year, your deductions amount to $20M. See Table 1 below for more examples. Many manufacturers employ large teams of staff to address these deductions oneby- one. Over half of the deductions end up being authorized. However, it takes significant effort to identify them. Those deductions that are not authorized are generally caused by compliance issues that require process corrections within the manufacturer operations in order to minimize their chances for recurrence. So, in the case of the company with $500M in sales, between $5M and $10M goes to compliance related penalties, plus they have the cost of the resources they assign to identify and work those issues.

Since most manufacturers have determined the average cost of pursuing deductions, there is a dollar limit below which the manufacturer just doesn't care to investigate. They'll grant that deduction without further thinking. The problems that may arise from this practice include:

1. Over time, the ability, cost, and time to review and confirm deductions may change. If the threshold for reviewing isn't revisited regularly, manufacturers may be losing money here – either by granting too many concessions or by not granting enough
2. Retailers can track concessions granted and get to know the threshold for suppliers. Unless manufacturers address number 1 above, they may end up automatically granting retailer concessions unnecessarily.
3. Doing a root cause analysis of a deduction may lead to the finding that certain data or processes can be fixed internally that resolve numerous deductions across many (dozens, hundreds, thousands) of settlements and reducing or eliminating further deductions of this type. Such root cause analysis isn't done when the threshold on any given settlement isn't enough to trigger the work.
4. Finding the root cause and actually fixing it are often disconnected issues without enough management commitment to carry out the corrective action
5. Settlement departments can become more focused on negotiating one-off settlements than on finding and resolving the problems that lead to these negotiations in the first place. When this happens, settlement departments grow in size as each issue is addressed individually, even when multiple issues are caused by one problem which, in turn, is never identified and/or resolved.

The deduction process is further complicated by the fact that retailers take deductions across invoices. Some of these are for compliance related issues and some are for promotional and other agreed-to allowances. When deductions for one transaction are applied to the settlement of another, it starts to become quite complex. The complexity leads to costs, costs which are eventually borne across the supply chain and by the consumer. These costs make a manufacturer's products less competitive or the manufacturer must settle for lower margins.

Quality Solutions

Manufacturers can minimize these costs through better governance of the entire lifecycles of their product management and orderto- settlement processes. Two areas to focus on are Product Data Quality and Transaction Quality. Product Data Quality (PDQ) programs are put in place to assure accuracy of product data. This is in contrast with Data Synchronization which focuses on getting nomenclature, formatting and delivery unified across the supply chain. We'll cover PDQ in our next article as it is a real driver for meeting the Perfect Order.

Transaction Quality (TQ) programs focus on making sure the order-to-settlement process is as accurate as possible, thus minimizing problems both in fulfillment and in settlement. A TQ program might include order alignment with both PDQ and thencurrent promotions.

Core to the TQ process, however, is a transaction and logistics visibility program that assures shipments are:

1. Accurate in terms of product and quantity shipped
2. On time
3. Sent to the right place
4. Accurate in terms of documentation

Assuring alignment of documents in an ongoing transaction can make sure that a manufacturer is prepared to execute a shipment accurately. However, regarding on time delivery, the RCC whitepaper stated the following “We believe that the principle reason that delivery has not received the attention it is due owes to the fact it is simply too hard to measure.” This difficulty arises when suppliers try to manage these significant volumes of information on their own. Outsourcing visibility services makes delivery much easier to measure as manufacturers can worry about addressing issues rather than implementing and managing logistics relationships with carriers.

Such solutions provide notification to the appropriate party/parties when transactions do not align with one another. For instance, a supplier might want to be notified when a shipment is not going to reach its destination on time so they can take steps to rectify the situation and proactively notify the retailer. These programs can also address some of the potential damage aspects of shipments if fitted with appropriate technology to identify when a shipping container gets too hot or too cold, is tipped or encounters other forms of physical stress.

"Companies that have moved to process collaboration with suppliers and customers report that they have been able to speed up their planning and execution cycles and can react to changes in demand much faster than before." -AberdeenGroup January 2007

Retailers and manufacturers can both benefit from logistics visibility programs. Retailers and manufacturers can go farther by embracing collaborative ASN and eInvoicing/ Settlement programs that assure inbound information all comes to them in one way. Manufacturers that don’t support electronic transactions can leverage the retailer’s ASN and eInvoicing solution to manually enter logistics and invoice information, and to receive labeling and shipping specifications for each order. Manufacturers can likewise take advantage of such programs with their suppliers, thus reducing errors and inventory as they more accurately fill retailer orders.

Participants in visibility programs can expect reduced costs in handling settlements. One reason is that the automation allows for a much speedier turn around in the processing of settlements. This, in turn, means that manufacturers are not hunting down transaction specifics three months after an event occurs. Immediacy in settlement leads to cleaner, more accurate settlement and results that are more easily signed off on for government compliance (Sarbanes-Oxley) purposes.

In addition, immediacy in settlement allows identification of, and attention to be paid to, internal data and process errors in near real-time. If these issues are identified and corrected, months of repeated problems can be avoided, thus considerably reducing ongoing settlement and logistics costs.

Specific benefits of a Transaction Quality program, then, include, but are not limited to, the following:

1. Reduced time to settlement (meaning more rapid payments to manufacturers)
2. Reduced time in addressing settlements through
   1. minimization of repeat offenses,
   2. immediacy in settlement,
   3. reduction in errors
3. Improved processes and visibility to those processes
4. Reduced out-of-stock/increased sales
5. Happier retailers

These benefits will put you on the way towards the ½% Solution. In effect, a Transaction Quality program that helps assure order-tosettlement process accuracy is a cornerstone of the RCC’s Perfect Order process and a key to supply chain success.

Read The ½% Solution – Part 2 >>

Bryan Scott Larkin is the director of strategy and marketing for the retail and consumer packaged goods industries at GXS. He also is a business technology advisor to the National RFID Center and a member of the Board of Governors of EIDX.